FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies
A hedge fund manager runs a long/short equity fund with 90% of capital in long positions and 40% of capital in short positions. What are the fund's net and gross market exposures?
Net exposure is long minus short, 90% minus 40%, giving 50%. Gross exposure is long plus short, 90% plus 40%, giving 130%. Net exposure measures directional market risk, while gross exposure measures total capital deployed and leverage.
- ANet 50%, gross 130%Correct
- BNet 130%, gross 50%
- CNet 50%, gross 50%
- DNet 90%, gross 130%
Explanation
Net exposure is long minus short: 90% - 40% = 50%. Gross exposure is long plus short: 90% + 40% = 130%. Reversing the two measures gives the second option, and the others misuse one of the calculations.
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